Both are non-cash expenses, but depreciation applies to tangible assets and amortization to intangibles or deferred items.
Published: 2025-12-20
Definition
Depreciation: Allocates the cost of tangible assets (e.g., equipment) over their useful life.
Amortization: Allocates the cost of intangible assets (e.g., patents) or deferred costs over time.
Why it matters
Both reduce reported earnings without immediate cash outflow. Depreciation erodes the book value of tangible assets; amortization affects intangibles. Understanding which dominates helps you judge the durability of book and earning power.
Where to apply it
When assessing NTAV/NCAV, separate tangible vs. intangible heavy businesses. In cash-flow analysis, add back these non-cash charges but consider maintenance capex for depreciation-heavy businesses.